Kelkar Wants Govt To Give Up Majority Stake In Oil Psus

Tariff Commission chairman Vijay Kelkar yesterday called for an urgent review of the governments policy of holding a majority stake in the oil companies.

It is high time this policy was reviewed as privatisation will create a network of dynamic and internationally competitive home-based oil companies to meet the consumers short- and long-term demands, Kelkar said while addressing the Second Vasant J Sheth Memorial Lecture on Transforming Indias oil industry: an agenda beyond pricing reforms here.

He further stated that the Indian oil industry must adopt a mission mode for developing capabilities in strategic areas like deep-water technology and technology to convert gas to liquid.

 

Both these technologies are critical in enhancing natural gas supplies in coming decades as the potential rewards from developing these technologies through private sector participation is very large.

Kelkar said deep-water technology will open a new frontier by giving access not only to the countrys offshore gas fields and vast natural gas hydrate resources, but also the natural gas resources in the Gulf region. Besides, by mastering deep-water technology, India can import crude from Qatar, Iran and Saudi Arabia through sub-sea pipelines at low costs and will be safe from hostile action of foreign countries, he added.

However, Kelkar chose to differ with the disinvestment commission on the strategy for privatisation. I hold a somewhat different perspective compared to the disinvestment commissions recent recommendation of the government entering into strategic partnership with private companies. I think a preferred route would be to have professionally managed oil companies which are widely held, with government holding a minority share. This will ensure that no single company, whether foreign or domestic, can hold a very large share and exercise undue control.

Kelkar said in an era of free market, stand-alone refineries or oil exploration and production companies will be exposed to greater risks with excessive uncertainties with regard to profit margins.

These uncertainties could be debilitating for small companies and they may not remain viable. What is required is a reorganisation of the different entities into fewer companies which are integrated but fiercely competing in the market place.

Such vertical integration, he said, can be done through equity swaps, acquisitions or mergers.

Although the exact mode that will be chosen will vary from case to case, it would argue that such restructuring may have to precede any large scale disinvestment programme of major oil companies and this will then give them a better value. The most interesting possibility for equity swap would be between Indian Oil Corporation (IOC) and Nil and Natural Gas Corporation (ONGC) to create a vertically integrated oil company whose size and potential capacity will be equal to some international majors, he said.

Technologically vibrant home-based oil companies, he said, can make a lasting contribution to Indias energy security by successfully competing with the oil majors. They can also play an important role in increasing the Indias share in the global oil reserves through alliances and in shaping the technological trajectory through building technological and innovation capabilities, he said.

Kelkar called for a comprehensive approach to transform the Indian oil industry into an internationally competitive industry capable of global presence.

He said the contours of the required comprehensive approach for the oil sector reforming the incentive structure with competitive markets, creating new institutions and realigning the organisations, enhancing technological and innovation capabilities and harnessing leadership at all levels government, industry, management and employees.

A revision of the incentive structure by introducing fierce competition would induce oil companies to produce, refine and market oil and gas efficiently, encourage technical innovations and attract required investments from domestic entrepreneurs or international majors.

He further called for determined efforts to exploit information technology in the oil industry. Sometimes I get an impression that almost 90 per cent output of the oil industry is information and only 10 per cent is oil. In other words, it is an extremely information intensive industry, he said, adding that the oil industry should exploit the competitive advantage aggressively in all aspects  upstream, midstream and downstream and gain international advantage.

International experience shows that technological capabilities reside in human resources and in an organisations ability to actualise them. International restructuring and empowerment would provide important bases for building up technological abilities, he said adding that innovative activities in the country should be promoted.

It is high time this policy was reviewed as privatisation will create a network of dynamic and internationally competitive home-based oil companies to meet the consumers short- and long-term demands.

Vijay L Kelkar, Tariff Commission chairman